The price-to-book (P/B)ratio is an evaluation metric that is used to compare the current market price of a company’s stock to its book value. The P/B ratio is favored by value investors for its usefulness in identifying undervalued companies.
The average P/B ratiofor banking firms, as of the first quarter of 2021, is approximately 1.28.
P/B is sometimes calculated as an absolute value, dividing a company's total market capitalization by the book value from the company's current balance sheet. The calculation is sometimes done on a per-share basis.
Key Takeaways
- The P/B ratio measures the market's valuation of a company relative to its book value.
- Lower P/B ratios are considered attractive to value investors.
- As of 2021, the average P/B for the broader market is around 3x.
- The average P/B for the banking sector for 2021 is lower, around 1.3x
Comparing P/B Ratios
Due to variables that uniquely apply to different types of businesses, average P/B values vary substantially between industries. The average P/B ratio for the banking industry is significantly lower than the overall market average P/B of 3.02.
Although an analysis of P/B values should always be filtered through same-industry comparisons, higher P/B ratios are usually an indication that investors anticipate that the company will generate additional profits from its existing level of assets. The perception of investors may also be that the current market value of the company is significantly higher than the company’s financial statements reflect.
Do Banks Low P/B Ratios Indicate Good Value?
The banking industry's average P/B value being down near onemakes it worthy of consideration by value investorswho seek out companies with P/B values below two, with a particular focus on companies showing values of oneor lower.
For value investors, a low P/B ratio is the classic indication of an undervalued stock. Growth investors are likely to consider investing in promising regional banks. Smaller regional banks are more likely than the big four of Wells Fargo, Bank of America, Citigroup, and JPMorgan Chase to experience significant growth over a relatively short period of time.
